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Loan-to-value (LTV) is a ratio of the amount of loan that can be given to the total value of the property. The LTV can range from 75 per cent to even 90 per cent of the property value and also depends on the borrower’s relationship with the lender and the scheme availed. A higher LTV implies a greater loan amount and therefore, lesser down-payment that you need to arrange out of your pocket. However, it also means a higher EMI. A lower LTV means that you have to arrange for a larger sum to be paid as down-payment.
LTV slabs and ceiling
The LTV ceiling depends on the quantum of loan sought and is divided into slabs. “The RBI has allowed up to 90 per cent LTV, if the loan is up to Rs 30 lakhs. The LTV for loans between Rs 30 lakhs and Rs 75 lakhs, is 80 per cent. For loans higher than Rs 75 lakhs, you can get a maximum LTV of 75 per cent. The age of the applicant, credit score and the total liabilities of the applicant, also affect the LTV they are eligible for,” explains Adhil Shetty, CEO, BankBazaar.com. A higher LTV also means that you will end up repaying a larger amount to the lender, through EMIs. If you have sufficient funds for the down payment, then, it would be best to opt for a smaller loan, as it would be less stressful to repay. You can also use excess funds that you may have, to close your loan earlier.
How much LTV should one look for?
When it comes to a property purchase, buyers generally tend to first look at their own finances and then bridge the shortfall through a home loan.
Kalpesh Dave, head – corporate planning and strategy, Aspire Home Finance Corporation Ltd (AHFCL) explains how much LTV would be ideal for a person, with the help of an example: “Let us assume that a home buyer is looking for a loan amount of Rs 25 lakhs, to purchase a property worth Rs 40 lakhs. He approaches two financial institutions, namely ‘A’ and ‘B’ for the loan amount. From the initial interactions, he gathers that ‘A’ would offer a loan of Rs 25 lakhs at an interest rate of nine per cent for a tenure of 20 years and ‘B’ would offer a loan of Rs 20 lakhs an interest rate of 8.5 per cent for the same tenure. In this case, even though the rate of interest offered by ‘B’ is lower, the buyer may prefer the home loan from ‘A’ as it would meet his funding requirements. Opting for lender ‘B’, would mean that he would still have to arrange for Rs 5 lakhs from other sources and bring uncertainty into an overall purchase transaction.”
Experts suggest that if you do not have enough savings to afford a huge down payment, it would be better to opt for a higher LTV. No matter what you decide, compare all your options carefully, before taking a decision. Calculate exactly how much you would need to pay back in either situation and do a cost-benefit analysis.
Factors that determine home loan eligibility
Income: Higher your income, greater the amount of money banks would be willing to lend to you.
Age: Your eligibility for a loan is connected to your age. Most banks usually have 60 years as the cut-off period to close a loan. So, if you take a loan at the age of 45, you will have only 15 years to repay the loan. Consequently, your loan eligibility will be higher at an early age, as you have a longer period to repay the loan.
Credit history: If you have a good credit history and score, the lender would be willing to give you a better LTV.
Total liabilities: Lenders calculate the ratio of your total current debt to your total current income, before giving a fresh loan. If you are currently repaying too many loans, the amount of home loan you will be sanctioned will be lower.
*Table provided by Bankbazaar.com